The Cottage


It was a home before the highway became more well traveled and a couple of extra lanes were added. Their former front yards reduced, the home (and surrounding properties) were perceived as better suited for commercial rather than residential use, and rezoned.

The site was first developed with an office, then a retail property, then a mix of both, and ownership through the years has alternated between onsite users, local investors, and estate beneficiaries. Perhaps as a result, leasing practices have often been inconsistent with typical office or retail properties locally.

Now, both insurance and health supplements are sold out of the first floor, and the second floor is used by the owner as a tattoo parlor. A quick canvassing of surrounding properties elicits no commonality of leasing practices... a dizzying variety of modified gross and modified net leases abound! So much for market based income modeling on this property.

You can look at the actuals and postulate a reasonable rent for the owner-used space, but deriving a cap rate out of a submarket such as this would simply be a guess.

For income analysis your best bet might be the Gross Rent Multiplier (GRM) method, a basic ratio of sale price to annual gross rent. Many brokers report that single family residential conversions are often purchased on a GRM basis, similar to buyers of small multifamily properties. To these buyers, the GRM is the only consistent metric available; rents may have some commonality and expenses are basically disregarded since each owner could have their own ideas on expenses.

These owners are part of an entire cottage industry of creative and entrepreneurial small realty investors.